Hedge Funds Assets Grow, Returns Don't

Critics contend that the number of hedge funds now dwarfs the number of investment opportunities they can exploit. Why smaller funds make sense.

Hedge funds are bigger than ever. As of Sept. 30, the industry managed a record $2.51 trillion in assets, according to the analysts at Hedge Fund Research. That's also a huge recovery from the depths of the financial crisis, when the funds' $1.87 trillion in assets fell by $400 billion. They not only run more money, but also there are more of them than ever: 8,201 in all, 567 more than before the crisis.

Four years of steady asset gains are enough for some experts to issue the industry a clean bill of health. "The...